Product innovation of classical life insurance caused by the financial crisis

Montenegro, 18th October 2012René Knapp, Group Chief Actuary

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Agenda

The economic framework• Key driver interest environment

Cornerstones of a life strategy under actual economic conditions• In-force business• New business

New concepts in life insurance

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Agenda

The economic framework

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The economic frameworkInterest and inflation are volatile key figures

Can interest guarantees be generated with justifiable risk?

How to define guarantees to allow for low interest rate environment?

• Guarantees in new business follow only slowly fast changing market conditions.

• Problem of reinvestment risk

• Awarness of value of options & guarantees started quite late on the Austrian market.

• Further decrease of new business interest rates to 1.75%

• Decreasing interest levels and rising spread lead to a reduction of profits due to saving products with guaranteed interest rates.

• Biometric products deliver stable profits

Measures • Adaptation of new products• Securing of business in-force

Return 10 year government bond

High return

Increased risk of loss

Low return

Low risk

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The economic frameworkInterest rate development

interest volatility (EUR)interest volatility (EUR)

Comments:

•Increased interest volatility already in 2009

•Returns and risk situation with a strong negative impact in classical life insurance

development 31.12.2009 – 30.09.2012development 31.12.2009 – 30.09.2012

0

5

10

15

20

25

30

09

09/12

25,6%

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25,5%

10

17,6%

14,4%

Zinsvola EUR

Comments:

•Further drop in interest rates in 1-9/2012

•In short-term period guaranteed rates are not reachable

• volatility is based on implicit volatility on capital market

• higher variation around low interest rates strongly increases the value of options and

guarantees

interest volatility EUR

0,000

0,500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0 5 10 15 20 25 30 35 40

28.09.2012

31.12.2011

31.12.2010

31.12.2009

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Agenda

Cornerstones of a life strategy

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Cornerstones of a life strategyIn-force business & new business – different measures

Management-guidelines

In-force business

• Development and usage of risk puffer possibilities

• Definition of restrained profit share policy

Strategy of capital

investment

• ALM sets priorities of asset allocation

• Reduction of duration mismatch due to Cash Flow/ Duration Matching

Portfolio development

• Active management of contract conversions based on current conditions

• Shift to profitable business

In force businessIn force business

Note: Duration Gap – the bigger the difference between duration of assets and liabilites the more massive is the difference between the values of interest rates; ALCO – Asset Liabiliity Committee; ALM – Asset Liability Management

Adaptation of product strategy

• New classical products– guarantee of interest

adjustable– New principles for

annuity payment

• Strenghtening Unit Linked/Index Linked

• New biometric-products

Management- guideline

new business

• Crucial investigation of product initiatives

• Product development due to fulfillment of conditions

– minimum rate of return

– risk bearing ability

• Value Management by objectives/incentives

no fixed,long-term

guarantees!

New businessNew business

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Agenda

New concepts in life insurance

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New concepts in life insuranceCompanies selling traditional life business forced to think about alternatives

Past Present Solution statement

• Additional interest earned

• High profit participation• Guarantees far out of the

money

• Low investment return• Low profit participation• Older business covering high

guarantees

Improve expense situation

Alternative guarantees• Temporary limited• Adjustment clause• Linked guarantees to

indices

Shift to unit and index linked business

Increase biometric portfolio

• Solvency II capital requirement– Small playing field

• Diversified investment strategies

• Insecure clients difficult for sales approach

• Facing the crisis (Euro-crisis, Japan-scenario)

• High initial commissions• Motivated sales

• Expenses are coverd by additional earnings on investment

• Cost structure too high for actual economic situation

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New concepts in life insuranceMarkets are in preparation – who will be first?

“Traditional life insurance policies will disappear

out of the portfolio of german life insurance

companies after reducing the guaranteed

interest rate to 1.75%.”3

“It does make sense to

implement adjustment

clauses in long term

guarantee contracts.”2

“New guarantee concepts as alternative:

Some insurance groups will go the way, to give

guarantees for a limited period only.“1

“Some concepts propose, not to fix the interest rate for the whole

life time of an annuity policy (…), but creating guarantees more

flexible . E.g. fix it for a limited period and do some adjusments

linked to the future economic environment.“4

1. Zeitschrift für Versicherungswesen 05 | 20122. Dr. Johannes Lörper, Vorsitzender der DAV und Vorstandsmitglied Ergo. Lebensversicherungen, in der Zeitschrift für Versicherungswesen 13 | 20113. Zeitschrift für Versicherungswesen 11 | 20114. Handelsblatt 10.04.2012

It is a question of time until insurance companies will enter the market with new guarantee concepts – one should be prepared!

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New concepts in life insuranceExample 1 – Austrian / German market

• Guaranteed interest rate fixed for all premiums for the whole duration

• Guaranteed rate only linked to the issuance of the contract

• Guaranteed rate can change for the whole contract

• Guaranteed rate linked to actual maximum guaranteed interest allowed

• Flexible guaranteed rate but fixed for each „line“ of the contract

• Guaranteed rate linked to actual maximum guaranteed interest allowed

Flexible interest rate guaranteeFlexible interest rate guarantee

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New concepts in life insuranceExample 2 – Italian market

Limitations of guaranteesLimitations of guarantees

Major impacts on the Italian market• Reduction of offered guarantees (reduced guarantees, guarantees at maturity)• Review of portfolio mix (transfering risk to clients)• New attention and metrics in product valuation (Solvency II)

UNIQA Italy – changes since 2011• Agent channel – MGR set to 2% for 5years, afterwards 0% (single premium)• Bank channel – MGR reduced to 1.5%, revisable for additional payments (single

premium)• Bank channel – MGR reduced to 1.25% (annual premium)

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New concepts in life insuranceExample 3 – Czech market

Complete change of product strategyComplete change of product strategy

Some basics about the Czech market• Business is generally quite profitable• Riders are very common in the market and bring additional profits to the companies• Unit linked business is well developed

UNIQA Czech Republic – changes since 2011• Complete change of product approach:

• First insurance cover sold is always a death cover• After death additional coveres (disability, dread disease, accident) are sold• If client can offer add. capital for savings, it is brought to unit linked business

• The impact: • low risk capital needed, high profits can be made• New business margins are above 10,0% (European average ~2,5%)

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Summary

Building awareness• Trad. life business is long term business and has to be treated this way• Guarantees are in many cases not priced and not managed on the asset

side• Fast changing economic environment – is your company prepared?

Setting measures• Different measures for the in-force and the new business• Implementing first ALM approaches, at least to measure duration

missmatch• Clear definition of a new business product strategy

Active management of guarantees• Steering the portfolio mix• Transferring guarantees to external partners• Reducing or more flexible approaches to guarantees